The Interaction of Signals: A Fuzzy Set Analysis of the Video Game Industry

Abstract

Customers continuously evaluate the credibility and reliability of a range of signals both separately and jointly. However, existing econometric studies pay insufficient attention to the interactions and complex combinations of these signals, and are typically limited as a result of difficulties controlling for multicollinearity and endogeneity in their data. We develop a novel theoretical approach to address these issues and study different signaling effects (i.e., word-of-mouth, brand reputation, and distribution strategy) on customer perceptions. Using data on the US video games market, we apply a fuzzy set qualitative comparative analysis (fsQCA) to account for cause-effect relationships. The results of our study address a number of key issues in the economics and management literature. First, our results support the contention that reviews from professional critics act as a signal of product quality and therefore positively influence unit sales, as do the discriminatory effects of prices and restricted age ratings. Second, we find evidence to support the use of brand extension strategies as marketing tools that create spillover effects and support the launch of new products.